So, I'm reading Tom Rees' article about the day global equity markets wobbled, this past Monday. In it he shares how a City trader had an eerie feeling something was coming. “There were no buyers of anything,” the trader mentioned. But what got me was the rest of the statement, “and the older guys were warning, 'this is going to collapse.'”
It reminded me of the dot.com bubble years when trading rooms were filled with twenty- and thirty-somethings with no memory whatsoever of a true bear market. Much like anything techy these days, the investment industry is a young man's field where those old enough to have a historical perspective are poo-pooed and ridiculed for being out of touch. This is a terrible time to have those without a historical perspective be in charge of our money. You need those old guys warning “this is going to collapse.” Otherwise, all you will have are young cowboys whose only frame of reference is that you always make money buying the dip. Big new flash: that is not going to work this time – at least not long-term.
We are on the verge of a mega bear market the likes of which we have not seen since since the last time it happened from 1967 to 1982. Curiously enough, the causes will be the same – a dearth of peak spenders, those 46 to 50 years old. Demographic forces have far-reaching economic implications and a continuous drop in births from 1921 through 1937 meant there would be a shortage of peak spenders 46 years later. At its lowest point, there were 748,000 fewer births than in 1921. The result was a general economic malaise from 1967 to 1982, a span that included the 70's stagflation years. Thereafter, the Baby Boomers came to the rescue, lifting our economy well into the new millennium.
The trouble is Baby Boomers are aging and graduating in droves from the 46-50-year-old bracket without a new generation coming to the rescue any time soon. In fact, we will have to wait until 2023 for the Millennials to start propping up the 46-50 group. And this time around the economic effect will be far more pronounced than in 1967-1982. The sheet numbers guarantee it. From the peak in births in 1957 to the low point in 1975 there were 1,156 fewer births. That means the economic fallout should be worse by at least 50%. Adding 46 years to the low point means a nadir in the 46-year old population in 2021 and minima in the 46-50 range two years later. Indeed, it will take until 2027 for peak spender numbers to reach the level of 2020.
Whether the economic downturn lasts until then remains to be seen. After all, investors look ahead, and if they see increased spending, even at the reduced levels of 2023, they will have greater earnings visibility and bid stocks up. What is clear, however, is that, starting this year, there will be reduced spending from the 46-50 age group. That will translate to continuously lower consumer spending, ever lower corporate profit visibility, and an historical reduction of PE multiples from today's elevated levels. Said another way, stock will go down, way down.
Consequently, here is a suggestion for the new generation of money managers – learn your economic history. Those who refuse to will undo revisit the words from old Jorge de Santayana: “Quienes olvidan el pasado están condenados a repetirlo.” Those who can not remember the past are condemned to repeat it.
Investors would do well to remember as much. The market may well recover from today's correction. But it will not last. Rocky III's Clubber Lang best described the coming market when asked about his fight prediction – “Pain!” Or how about this: prolonged stock market carnage. You might want to do something about that.